Sunday, November 18, 2012

Why we have a crisis

A fairly simple explanation why we need to tax capital more and income less: This is real, not the fantasy talk of economics you get in the papers. We are in the shit because we allowed the wage share of national income to fall. If people do not have money to buy things, the economy cannot grow. What neoliberals pretend isn't true is that you can't sell things if people have no money to buy them. But this intuitively obvious thing is an economic fact: no demand, no growth. The outcome has been that people have taken on huge amounts of debt to compensate for their lack of growth of real income. This has allowed economies to stagger on with low growth for the past 30 years but eventually we get to the point where no one can borrow any more: in effect this is what happened in 2007 -- we had indebted everyone who could become indebted and had begun to indebt people who simply could not service any debt whatsoever. The correct solutions to our woes are not palatable because they are framed in terms of ordinary people suffering a loss on their pensions. But the truth is, we need to correct the imbalance between the profit share and the wage share, or we will simply stagger from crisis to crisis. Also, it should go without saying that what we do not need right now is austerity. Are policymakers blind? Can they just not see the outcome of the policies they propose in Europe? As Europe repeats the dose over and over, and gets the same result, how is it so difficult to see that it's the wrong medicine? What is needed, here in Australia, in the US and even more so in Europe, is not to pretend we have a debt problem, or to focus on diminishing government at a time when its spending is needed just to keep us afloat. It's to run huge deficits so that households can pay down debt and businesses can have the demand that they need. This post shows clearly what actually happens in our economy, and how government spending is needed for saving, and the dire outcome of too little government spending. Now, does that mean governments must be huge? No. Decisions about what the government does or doesn't provide are quite separate from how they are "funded". But whether they are bigger or smaller at any given point is important. Right now, we need governments to spend more until we restructure our economies. But until we put more money into the pockets of workers, we just cannot diminish the size of government without the outcome simply being more unemployment and great suffering for workers. In any case, how much the government spends is not really correlated with how intrusive the government is. You can agree that the government has too broad a scope without feeling that it should control less of the national economy.


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